The new Trump administration is coming in with mass deportations of undocumented immigrants and threats of triggering a global trade war, adding to the uncertainty in the market. Despite these risks, investors remain optimistic, with the S&P 500 Index setting another record just this week. The small-cap Russell 2000 Index has nearly doubled the S&P 500’s performance over the past two weeks and is approaching its first record since 2021. The Cboe Volatility Index is at levels that historically indicate serenity among traders.
Some Wall Street pros are, however, sounding the alarm, warning that the market’s extreme optimism may be a cause for concern. “One of my top concerns is extreme bullishness, and we are seeing signs of that,” said Eric Diton, president and managing director of the Wealth Alliance. “We know from history that when investors are too bullish, and everyone is in the market, the question is who is buying to drive it higher?”
Despite the concerns, investors are flocking to the riskiest parts of the market, with household equity holdings at a record level and households taking on more risk. The S&P 500 has delivered double-digit gains for the second year in a row, and investors expect another year of double-digit gains in 2025.
However, some pros point to signs of exuberance, such as the S&P 500’s relentless climb to new highs and the rising popularity of small-caps. The Russell 2000 Index has led the broader market higher, with some investors betting that the new administration’s protectionist trade policies will benefit smaller companies.
But others warn that the market may be getting too frothy, with valuations stretched and the potential for a correction looming. “In trader talk, this seems like a group to date, but not to marry,” said Steve Sosnick, chief strategist at Interactive Brokers. “Anyone who thinks we are not in a highly speculative period, if not a bubble, isn’t really paying attention.”
Optimists, on the other hand, point to the broadening of market leadership, with stocks from industries other than technology or AI gradually taking over. They also note that valuations, while stretched, are not quite at peak levels. “While the S&P 500’s 10-year annualized return has climbed sharply, it’s not at the point where investors might want to abandon ship just yet,” said Cameron Crise, a Bloomberg analyst.